The Role of Emotions In Financial Decisions: How To Keep Your Cool

How many times have you found yourself making a purchase based off of emotion? Maybe buying a new gadget out of excitement, buying groceries you didn’t need out of excitement — we’ve all been there. Fear, guilt, excitement, and even boredom can drive how we spend, save, and manage our finances. Emotions are a natural part of being human. But, they can lead to impulsive decisions that may harm our long-term financial goals.

This post will explore how emotions affect financial decisions. It will also give ways to take control. By the end, you’ll know how to identify emotional triggers and keep a cool head when it matters most.

How Emotions Influence Financial Decisions

1. Fear

Fear is one of the most powerful emotions affecting finances. It often shows up as:

• • Fear of Missing Out (FOMO): Buying the latest gadget, taking a last-minute trip, or jumping into trendy investments because “everyone else is doing it.”

• • Fear of Scarcity: Hoarding money or oversaving because of a belief that there’s never enough.

For example, you might avoid investing if you’re afraid of losing your money. In the meantime, your savings are losing value due to inflation.

Solution: Educate yourself on financial concepts. Knowledge reduces fear. I remember when I first started learning about investing. I was so nervous as I sorted through the sea of YouTube videos and articles.

I’m still learning, but with the knowledge I’ve gained I am able to make good investing decisions for my future. If you like low risk, consider a high-yield savings account (HYSA), bonds, or a Certificate of Deposit (CD). These are popular options to build confidence.

2. Guilt

Guilt can lead to overcompensating, overspending, or avoiding financial decisions altogether. Common scenarios include:

• • Overspending on loved ones because you feel guilty about working long hours.

• • Avoiding overdue bills because you feel ashamed about debt.

For example, you might buy expensive gifts for your family to make up for missing milestones, even though it stretches your budget.

Solution: Set clear boundaries. Instead of overspending, plan budget-friendly gestures —like a handwritten card or quality time.

3. Excitement

Excitement can fuel impulsive purchases, like splurging during a sale or chasing the thrill of buying something new.

For example, you might get a bonus at work and immediately spend it on a luxury handbag instead of your planned savings goals.

Solution: Pause before you purchase. Follow the 24-hour rule: wait a day before making a big decision. This gives your rational mind time to weigh in.

4. Boredom

Boredom spending, also known as “retail therapy,” can lead to buying things you don’t need just to pass the time.

For example, how many of us have been doom scrolling through and end up buying gadgets we’ll never use? That’s exactly it.

Solution: find productive ways to cope with boredom, like exercising, journaling, or tackling a hobby. Remove shopping apps from your phone to reduce temptation. It may even be a good idea to remove your debit/credit card from your digital wallet.

Signs That Emotions Are Controlling Your Finances

Not sure if emotions are in the driver’s seat? Look out for these signs:

• • Impulse purchases: Buying without a plan or justification.

• • Regret after spending: Feeling buyer’s remorse frequently.

• • Avoiding money conversations: Ignoring bills, budgeting, or financial planning.

• • Over-rewarding yourself: Constantly justifying purchases with phrases like, “I deserve this.”

How to Manage Emotions in Financial Decisions

1. Track Your Spending Triggers

Keep a spending journal for a week. Write down what you buy, why you bought it, and how you felt at the time. Patterns will start to emerge—like spending more when you’re stressed or bored.

2. Create a Spending Plan

Budgeting isn’t about restriction; it’s about intention. Allocate money for needs, wants, and savings so you can enjoy spending without guilt. To simplify things, consider a popular method like the 50/30/20 rule.

• • 50/30/20 Breakdown:
    
    • • 50% Needs: Rent, utilities, groceries.
    • • 30% Wants: Hobbies, dining out.
    • • 20% Savings/Debt Repayment.

3. Set Financial Goals

Having a clear goal, like saving for a vacation or paying off debt, helps curb impulsive decisions. Break it down into small, achievable steps.

4. Practice Emotional Detachment

Before making a financial decision, ask yourself:

• • Is this a want or a need?

• • Will this matter to me in a week, month, or year?

• • Am I buying this to solve an emotional issue?

5. Automate Financial Decisions

Take emotions out of the equation by automating savings, bill payments, and investments. This ensures your priorities are met without the temptation to divert funds.

When to Seek Help

If emotions are causing significant financial stress, it’s okay to ask for help. Consider:

• • Talking to a financial coach: This website has plenty of articles, videos, e-books, and resources to help you understand how to manage money. For retirement and investment planning, a CFP can provide personalized strategies to help manage money.

• • Using budgeting templates or apps: Tools like YNAB can keep your finances on track.

• • Therapy: Money issues are often tied to deeper emotional challenges. A therapist can help you understand the root of your emotions. It’s nothing to be ashamed of, and it’s okay to seek help.

Quick Tips to Keep Your Cool

• • Use cash for discretionary spending: It’s harder to part with physical money than to swipe a card.

• • Set a spending cap: Decide on a limit before shopping trips. Sometimes, a shopping list isn’t enough. Bringing only the amount of cash you want to spend and not a penny more is a great way to stay on track.

• • Unsubscribe from marketing emails: To reduce the amount of ads you see, unsubscribe to reduce your temptation to spend.

• • Practice mindfulness: Meditation or deep breathing can help you regain focus when emotions flare.

TL;DR

Emotions play a huge role in financial decisions, but they don’t have to control them. By identifying your emotional triggers and implementing thoughtful strategies, you can make smarter, more intentional choices with your money.

Start small: track your spending for a week and see what patterns emerge. From there, build habits that align with your financial goals and values. Remember, keeping your cool isn’t about ignoring emotions—it’s about managing them wisely.